Q UA R T E R LY R E P O R T MARCH

Transcription

1 QUARTERLY REPORT MARCH 31, 2010

2 Copies of quarterly and annual reports are available upon request by contacting AgriBank, FCB, 375 Jackson Street, St. Paul, Minnesota or by calling (651) Reports are also available at MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion is a review of the financial position and results of operations of AgriBank, FCB. This information should be read in conjunction with the accompanying financial statements, the notes to the financial statements and the 2009 annual report. We provide funding and business services to Associations in states across America s heartland. The Associations are chartered to serve customers in substantially all of Arkansas, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee, Wisconsin and Wyoming. The Associations provide credit and services to farmers, ranchers, rural residents and agribusinesses. AgriBank and its Affiliated Associations are collectively referred to as the District. RESULTS OF OPERATIONS Our net income for the three months ended March 31, 2010 totaled $136.2 million compared to $85.7 million for the same period in The return on average assets was 0.83% for the three months ended March 31, 2010 compared to 0.54% for the same period in The following table illustrates changes in the significant components of net income: Increase (decrease) in net income (in millions) Three months ended March vs Net interest income $26.3 Provision for loan losses 0.6 Non-interest income 14.5 Operating expenses 1.7 Loan servicing fees paid to Associations 0.2 Asset impairment 7.2 Total change in net income $50.5 Net interest income for the three months ended March 31, 2010 increased by $26.3 million or 25.2% from the same period in The increase in net interest income was due to the positive effects of changes in volume of $2.6 million, and positive effects of changes in rates of $23.7 million. Average earning assets increased to $64.9 billion for the three months ended March 31, 2010 compared to $61.9 billion for the same period in Loans totaled $54.5 billion at March 31, 2010, which is $1.2 billion less than the December 31, 2009 balance, reflecting seasonal pay downs consistent with historical experience. The positive impact of changes in rates was due to declining interest rates on debt, including positive funding results related to exercising options on callable debt and other funding. The following table presents the impact on net interest income due to changes in volume and rates based on the average daily balances for loans, investments and debt: Three months ended March 31, 2010 (in millions) Volume Rates Combined Loans $15.7 $(59.4) $(43.7) Investments 2.5 (19.9) (17.4) Interest income 18.2 (79.3) (61.1) Debt (15.6) Net change in net interest income $2.6 $23.7 $26.3 1

3 Information regarding the year-to-date average daily balances (ADBs) and annualized average rates earned and paid on our portfolio follows: (in millions) Three months ended March 31, 2010 ADB Rate ADB Rate Earning assets: Wholesale loans $47, % $44, % Retail accrual loans 7, % 7, % Retail nonaccrual loans % % Investments and federal funds 10, % 9, % Total earning assets 64, % 61, % Total interest bearing liabilities 61, % 59, % Total interest rate spread 0.72% 0.56% Impact of equity financing $3, % $2, % Net interest margin 0.80% 0.67% The average interest rate spread was 0.72% during the first three months of 2010 compared to 0.56% in Interest rate spread is the difference between the rate we earn on interest earning assets and the rate we pay on interest bearing liabilities. Our spread has continued to be positively impacted by a period of falling interest rates, followed by relatively stable rates and a steep yield curve, in which we were able to call and reprice a significant amount of debt faster than our assets repriced. We were also able to convert some of our bonds from a fixed rate to a floating rate. The impact of equity financing was negatively impacted by the decline in interest rates, dropping from 11 basis points for the first three months of 2009 to 8 basis points for the first three months of Changes in loan volumes are further discussed in the Loan Portfolio section of this report. The change in net income for the first three months of 2010 was impacted by a decrease of $0.6 million in provision for loan losses In the current year, this reflected improvement in the ethanol sector and continued difficulty in the dairy sector. During the first three months of 2009, provision expense primarily related to the ethanol sector. The change in non-interest income for the first three months of 2010 results primarily from a $13.4 million increase in other gains due to our share of distributions from Allocated Insurance Reserve Accounts (AIRA). These reserve accounts were established in previous years by the Farm Credit System Insurance Corporation when premiums collected increased the level of the Insurance fund beyond the required 2% of insured debt. In addition noninterest income also increased due to a $6.3 million increase in mineral income following successful well completions plus strong lease and exploration activities, offset by a $2.8 million decrease in loan prepayment and fee income, and a $1.4 million decline in income refunded by the Farm Credit System Association Captive Insurance Company. The decline relates to the medical stop-loss program which experienced a loss in The decrease in operating expense results primarily from a $2.2 million decrease in Farm Credit System Insurance Corporation premiums offset by increases in other miscellaneous expenses including FCA assessment expenses and Farm Credit Council Service expenses. The decrease in the insurance corporation premiums is primarily due to a decrease in the premium rate to 10 bps compared to 20 bps in Loan servicing fees paid to Associations decreased due to repayments in retail loan participations purchased under the Asset Pool program. We evaluated all investments in an unrealized loss position and determined that thirty-one securities were in other-than-temporary loss positions at March 31, As a result of this evaluation, we have recognized $8.9 million in impairment losses during the first quarter of 2010 compared to $16.1 million for the same period in See additional discussion in the Investment Portfolio section of this report. LOAN PORTFOLIO The following table presents the components of loan volume: March 31, December 31, (in millions) Accrual loans Wholesale $47,192.7 $48,040.6 Retail 7, ,507.5 Nonaccrual loans Total loan volume $54,492.8 $55,659.8 Loan volume totaled $54.5 billion at March 31, 2010, a decrease of $1.2 billion from December 31, Loan growth has moderated during 2010, reflective of softening loan demand due to a decline in commodity prices, continued adherence to strong credit underwriting standards and to the overall 2

4 downturn in the U.S. and global economies. The decrease in loan volume during the first three months of 2010 resulted primarily from the seasonal repayment impact, as well as a decrease in capital market activity. The seasonal impact reflects that loan volume typically increases throughout the year as farmers borrow for operating and capital needs and then declines because of payments after harvest, and the volume of annual payments made in the first quarter. The components of risk asset volume follow: March 31, December 31, (in millions) Nonaccrual $120.1 $111.7 Accruing restructured Past due 90 days or more still accruing Total risk loans $128.3 $118.9 Other property owned Total risk assets $131.6 $121.5 Risk loans as % of total loans 0.24% 0.21% Risk assets as % of total loans plus other property owned 0.24% 0.22% Delinquencies as a % of total loans 0.10% 0.13% Our risk assets have remained relatively stable from December 31, 2009, and remain at acceptable levels. Based on management s analysis, all loans 90 days or more past due and still accruing interest were adequately secured and in the process of collection and, as such, were eligible to remain in accruing status. The increase in nonaccrual loans was due primarily to stress in the dairy industry. Despite the increase in nonaccrual loans, total risk loans as a percentage of total loans remains within our established risk management guidelines. The volume of nonaccrual loans remained at an acceptable level at March 31, 2010, representing 0.22% of our total portfolio. At March 31, 2010, 70.6% of nonaccrual volume was current as to principal and interest. Credit quality on retail loans remains at acceptable levels with 96.1% of our portfolio in the acceptable and special mention categories, compared to 96.6% at December 31, 2009; however, there has been an increase in adversely classified retail volume. Adversely classified volume increased to 3.9% at March 31, 2010 from 3.4% at December 31, These increases have been driven primarily by stress in the dairy sector. One wholesale loan was classified as special mention beginning in the third quarter of 2009 and was still classified as special mention at March 31, This Association has been impacted by stress in the pork, dairy and ethanol sectors. This Association issued $100 million of subordinated debt in March which strengthened certain of their loan covenants. We are actively engaged with this Association to ensure they are taking appropriate actions to address and rectify the credit quality issues within their loan portfolio. Since the third quarter of 2009, there has been a positive trend relative to these loan quality covenants. The wholesale loan represents $4.6 billion of AgriBank wholesale loan volume at March 31, Comparative allowance coverage of various loan categories follows: March 31, December 31, Allowance as a percentage of: Loans 0.05% 0.04% Nonaccrual loans 22.35% 20.95% Total risk loans 20.93% 19.70% The allowance for loan losses is an estimate of losses on loans in our portfolio as of the financial statement date. We determine the appropriate allowance level based on periodic evaluation of factors such as loan loss history, portfolio quality and current economic and environmental conditions. During the first three months of 2010 we increased our allowance for loan losses by $5.0 million, which is net of the impact of $1.6 million of net chargeoffs. These allowance changes are reflective of further deterioration in the dairy sector of our portfolio. We consider the allowance for loan losses at March 31, 2010 to be reasonable in relation to the risk in our loan portfolio. 3

5 INVESTMENT PORTFOLIO At March 31, 2010, investments and federal funds totaled $10.1 billion, up $502 million from December 31, We evaluated all investments in an unrealized loss position and determined that thirty-one securities were in other-than-temporary loss positions at March 31, We believe underlying credit issues in the housing related mortgages that support these securities may result in us not collecting all principal and interest contractually due. As a result of this evaluation, we recognized $8.9 million in impairment losses during the first quarter of 2010 compared to $16.1 million for the same period in No other securities, including those in the housing related asset and mortgage backed sectors, were in an other-thantemporary loss position. We have not changed our methodology for identifying securities on which to run our cash flow analysis nor have we changed our methodology for determining fair value. We continuously evaluate our assumptions and adjust those assumptions as appropriate. See Note 3 for further discussion on investment impairment. We continue to closely monitor our housing related mortgage-backed and asset-backed securities. At March 31, 2010, investment securities included non-agency mortgage-backed securities with a fair value of $349.7 million and housing related asset-backed securities (subprime, insurance wrapped and second liens) with a fair value of $275.8 million. The fair value of the non-agency mortgage backed assets reflected a $112.9 million unrealized loss, and the fair value of the housing related asset-backed securities reflected an unrealized loss of $76.3 million. At March 31, 2009, our non-agency mortgage-backed securities had a fair value of $478.0 million and housing related asset-backed securities had a fair value of $390.4 million. The fair value of the non-agency mortgage backed assets reflected a $228.5 million unrealized loss, and the fair value of the housing related asset-backed securities reflected a net unrealized loss of $135.9 million at March 31, At March 31, 2010, we had securities that, because the ratings were downgraded below AAA, were no longer eligible under FCA regulations. The fair value of all ineligible investments totaled $430.5 million including $135.4 million on which we have taken impairment charges. Of the securities ineligible under the FCA regulations, securities totaling $363.1 million have been approved by the FCA to hold beyond six months and be included in AgriBank s net collateral ratio. Securities totaling $67.4 million have not yet received FCA approval. On March 18, 2010, we submitted a plan for approval to FCA for the remaining ineligible investments. We believe we will receive approval from FCA to continue holding these securities and counting the fair value in our net collateral ratio. In addition, we held split-rated mortgage-backed securities with a fair value of $94.0 million that were downgraded below AAA by at least one rating agency, including $3.1 million on which we have taken impairment. All of these securities were housing related securities. We also held $46.9 million of non-agency mortgage-backed securities and home equity asset-backed securities on credit watch. If any security doesn t retain an AAA rating by at least one rating agency, the security would become ineligible. AGRICULTURAL CONDITIONS Net farm income levels in 2009 declined significantly from the record net farm income levels of 2008 reflecting declines in both crop and animal agriculture sectors. The United States Department of Agriculture ( USDA ) estimates 2009 net farm income to have been $56.4 billion, down $30.4 billion (34.5%) from USDA currently forecasts net farm income for 2010 to be slightly higher than 2009 at $63.0 billion, with all of the 2010 recovery in profitability to come from increased meat and dairy margins, with continuing reductions in net crop income expected through FUNDING, LIQUIDITY AND MEMBERS EQUITY AgriBank is responsible for meeting the District's funding, liquidity and asset/liability management needs. Access to funding remains the primary source of liquidity for AgriBank. We also maintain liquidity through our investment portfolio. Our liquidity policy requires us to maintain a minimum of 90 days of liquidity on a continuous basis, assuming no access to the debt capital markets. As of March 31, 2010, we had sufficient liquidity to fund all debt maturing within 165 days. During the fourth quarter of 2009, we began transitioning the composition of the liquidity investment portfolio to comply with voluntary guidelines we agreed upon with the other System Banks to improve the quality of liquidity portfolios. The most significant change is that each bank agrees to maintain at least 15 days of liquidity coverage in a combination of U.S. Treasury securities maturing within 3 years, cash held in Federal Reserve Banks or debt to be settled. Our analysis indicates that $3 billion of qualifying U.S. Treasury securities will be held for this purpose. As of March 31, 2010, we held qualifying instruments totaling $3.6 billion representing 34 days of liquidity coverage. In July 2009, we issued $500 million of 9.125% unsecured subordinated notes due The effect of the transaction increased certain regulatory capital ratios pursuant to the Farm Credit Administration regulations. These notes are unsecured and subordinate to all other categories of creditors, including general creditors, and senior to all classes of shareholders. Total members equity at March 31, 2010 was $3.3 billion, an $83.3 million increase from December 31, Members equity was positively impacted through the first quarter of 2010 by net income and changes in other comprehensive income. These increases were offset by earnings reserved for patronage distributions and a decrease in stock and participation certificates reflecting the decline in loan volume. 4

6 CERTIFICATION The undersigned have reviewed the March 31, 2010 quarterly report of AgriBank, FCB which has been prepared under the oversight of the audit committee and in accordance with all applicable statutory or regulatory requirements and that the information contained herein is true, accurate, and complete to the best of our knowledge and belief. Keri Votruba Chairman of the Board May 7, 2010 L. William York Chief Executive Officer May 7, 2010 Brian J. O Keane Senior Vice President and Chief Financial Officer May 7,

7 STATEMENT OF CONDITION AgriBank, FCB (Dollars in thousands) (Unaudited) March 31, December 31, Assets Loans $54,492,846 $55,659,788 Allowance for loan losses 26,853 23,412 Net loans 54,465,993 55,636,376 Investment securities 9,762,673 8,866,278 Cash 49,853 71,182 Federal funds 314, ,805 Accrued interest receivable 472, ,059 Derivative assets 270, ,900 Other property owned 3,327 2,622 Other assets 115, ,109 Total assets $65,455,589 $66,143,331 Liabilities Bonds and notes $60,956,856 $61,688,802 Subordinated notes 500, ,000 Accrued interest payable 344, ,390 Derivative liabilities 9,121 9,244 Collateral pledged by counterparties 192, ,197 Other liabilities 103, ,063 Total liabilities 62,105,671 62,876,696 Contingent liabilities Members' equity Capital stock and participation certificates 1,679,613 1,702,257 Unallocated surplus 1,797,063 1,723,910 Accumulated other comprehensive loss (126,758) (159,532) Total members' equity 3,349,918 3,266,635 Total liabilities and members' equity $65,455,589 $66,143,331 The accompanying notes are an integral part of these financial statements. 6

8 STATEMENT OF INCOME AgriBank, FCB (Dollars in thousands) (Unaudited) Three months Period ended March Interest income Loans $402,275 $445,932 Investment securities and federal funds 24,069 41,482 Total interest income 426, ,414 Interest expense 295, ,162 Net interest income 130, ,252 Provision for loan losses 5,000 5,634 Net interest income after provision for loan losses 125,544 98,618 Non-interest income Business services income 4,688 4,777 Loan prepayment and fee income 9,558 12,392 Allocated insurance reserve account distribution 13,438 - Miscellaneous income and other gains, net 9,298 5,331 Total non-interest income 36,982 22,500 Non-interest expense Salaries and employee benefits 6,938 6,700 Other operating 7,483 9,341 Loan servicing fees paid to Associations 3,082 3,330 Impairment losses recognized in earnings: Total other-than-temporary impairment losses (recoveries) 12,360 16,066 Portion of loss recognized in other comprehensive income (3,508) - Net impairment losses recognized in earnings 8,852 16,066 Total non-interest expense 26,355 35,437 Net income $136,171 $85,681 The accompanying notes are an integral part of these financial statements. 7

9 STATEMENT OF CHANGES IN MEMBERS' EQUITY AgriBank, FCB (Dollars in thousands) (Unaudited) Accumulated Other Comprehensive Capital Stock and Non-other-than- Income (Loss) Other-than-temporarily- Comprehensive Participation Unallocated temporarily-impaired impaired Income Certificates Surplus Investments Investments Derivatives Total Balance at December 31, 2008 $1,624,616 $1,537,850 $(354,731) $ -- $(40,523) $2,767,212 Comprehensive income Net income $85,681 85,681 85,681 Other comprehensive income: Change in net unrealized losses on investment securities, net of reclassification adjustment of $16,066 7,010 7, ,010 Change in net unrealized losses on cash flow hedges, net of reclassification adjustment of $(297) 18,664 18,664 18,664 Other comprehensive income 25,674 Total comprehensive income $111,355 Patronage (51,608) (51,608) Capital stock/participation certificates issued 6,866 6,866 Capital stock/participation certificates retired (12,142) (12,142) Balance at March 31, 2009 $1,619,340 $1,571,923 $(347,721) $ -- $(21,859) $2,821,683 Balance at December 31, 2009 $1,702,257 $1,723,910 $(119,870) $(70,462) $30,800 $3,266,635 Comprehensive income Net income $136, , ,171 Other comprehensive income: Change in unrealized losses on investment securities with other-thantemporary impairment recognition, net of reclassification adjustment of $7,898 7,235 7,235 7,235 Change in unrealized losses on investment securities not otherthan-temporarily impaired, net of reclassification adjustment of $954 39,234 39,234 39,234 Change in net unrealized gains on cash flow hedges, net of reclassification adjustment of $1,988 (13,695) (13,695) (13,695) Other comprehensive income 32,774 Total comprehensive income $168,945 Patronage (63,018) (63,018) Capital stock/participation certificates issued 39,389 39,389 Capital stock/participation certificates retired (62,033) (62,033) Balance at March 31, 2010 $1,679,613 $1,797,063 $(80,636) $(63,227) $17,105 $3,349,918 The accompanying notes are an integral part of these financial statements. 8

10 STATEMENT OF CASH FLOWS AgriBank, FCB (Dollars in thousands) (Unaudited) Three months ended March Cash flows from operating activities Net income $136,171 $85,681 Adjustments to reconcile net income to cash flow from operating activities: Depreciation on premises and equipment Provision for loan losses 5,000 5,634 Increase in accrued interest receivable (300,560) (332,276) Decrease in other assets 13,011 10,050 Increase (decrease) in accrued interest payable 18,107 (42,588) Decrease in other liabilities (78,512) (18,275) Loss on derivative activities 1,017 2,312 Impairment of investments 8,852 16,066 Insurance refund related to FAC stock (5,141) -- Gain on sale of premises and equipment -- (1) Gain on bonds held at fair value under fair value option (249) (1,356) Total adjustments (337,712) (359,844) Net cash used in operating activities (201,541) (274,163) Cash flows from investing activities Decrease in loans, net 1,482, ,506 Proceeds from sale of other property owned (Increase) decrease in investment securities, net (858,777) 457,059 Purchases of premises and equipment, net (466) (1,216) Proceeds from insurance refund related to FAC stock 1, Net cash provided by investing activities 624,493 1,010,349 Cash flows from financing activities Consolidated bonds and notes retired, net (773,982) (565,436) Cash collateral pledged by counterparties, net 21,893 24,320 Patronage distribution paid (50,383) (51,829) Capital stock/participation certificates retired, net (35,722) (5,276) Net cash used in financing activities (838,194) (598,221) Net (decrease) increase in cash and federal funds (415,242) 137,965 Cash and federal funds at beginning of year 779, ,823 Cash and federal funds at end of period $364,745 $866,788 Supplemental schedule of non-cash activities Increase in derivative assets $(27,447) $(9,367) (Decrease) increase in derivative liabilities (124) 6,454 Increase (decrease) in bonds and notes from derivative activity 42,285 (13,437) (Decrease) increase in members' equity from cash flow derivatives (13,697) 18,664 Increase in members' equity from investments 46,469 7,010 Loans transferred to other property owned Interest capitalized to loan principal 318, ,976 Patronage distributions payable to members Patronage paid in stock 13, Supplemental information Interest paid $277,693 $425,750 The accompanying notes are an integral part of these financial statements. 9

11 NOTES TO FINANCIAL STATEMENTS AgriBank, FCB NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES AgriBank, FCB is one of the banks of the Farm Credit System (the System), a nationwide system of cooperatively owned banks and associations, established by Congress and subject to the provisions of the Farm Credit Act of 1971, as amended. The system specializes in providing financing and related services to qualified borrowers for agricultural and rural purposes. At March 31, 2010 the District had 17 Agricultural Credit Association parent associations, each of which has wholly owned Federal Land Credit Association and Production Credit Association subsidiaries. AgriBank, FCB serves as the intermediary between the financial markets and the retail lending activities of the District Associations. A description of our organization and operation, significant accounting policies followed, financial condition, and results of operations as of and for the year ended December 31, 2009 are contained in the 2009 annual report. These unaudited first quarter 2010 financial statements should be read in conjunction with the annual report. The accompanying financial statements contain all adjustments necessary for a fair presentation of the interim financial condition and results of operations and conform to accounting principles generally accepted in the United States of America and prevailing practices within the financial services industry. Recent Accounting Developments Effective January 1, 2010, we adopted the Financial Accounting Standards Board (FASB) amended guidance on Accounting for Transfers of Financial Assets, which amended previous guidance by providing clarification of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The guidance also requires additional disclosure about transfers of financial assets and a transferor s continuing involvement with transferred assets. This guidance must be applied to transfers occurring on or after the effective date of January 1, Adoption of this guidance did not have a material impact on our financial statements. Effective January 1, 2010, we adopted FASB amended guidance on Fair Value Measurements and Disclosures, which is to improve disclosures about fair value measurements by increasing transparency in financial reporting. The guidance provides for a greater level of disaggregated information and more robust disclosures of valuation techniques and inputs to fair value measurements. The adoption of this guidance had no impact on our financial condition and results of operations but resulted in additional disclosures. NOTE 2 LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses is presented in the following table: Three months ended March (in thousands) Balance at beginning of period $23,412 $13,883 Provision for loan losses 5,000 5,634 Charge-offs (2,207) (1,677) Recoveries Balance at end of period $26,853 $17,918 The allowance changes in 2010 are reflective of continued deterioration in dairy sector of the portfolio. We consider the allowance for loan losses at March 31, 2010 to be reasonable in relation to the risk in our loan portfolio. 10

12 The following table presents information concerning risk loans (risk loans include nonaccrual loans, accruing restructured loans, and loans past due 90 days or more and still accruing interest): (in thousands) March 31 December 31 As of: Volume with specific reserves $67,683 $58,190 Volume without specific reserves 60,604 60,679 Total risk loans $128,287 $118,869 Total specific reserves $18,343 $13,879 For the three months ended March (in thousands) Income on accrual risk loans $79 $94 Income on nonaccrual loans Total income on risk loans $713 $1,084 Average recorded investment $121,668 $72,866 The increase in risk loans reflects stress in the dairy sector of the portfolio. NOTE 3 INVESTMENT SECURITIES AND FEDERAL FUNDS A summary of the amortized cost and fair value of investment securities and federal funds follows. Commercial paper and other is primarily corporate and municipal obligations, certificates of deposit and term federal funds. All securities are classified as available for sale. As of March 31, 2010 Weighted Amortized Unrealized Unrealized Fair Average (in thousands) Cost Gains Losses Value Yield Mortgage-backed securities $3,526,270 $32,498 $117,497 $3,441, % Commercial paper and other 3,069, ,070, % U.S. Treasury securities 2,556, ,556, % U.S. Agencies 345,088 16, , % Asset-backed securities 408,704 8,474 84, , % Federal funds 314, , % Total $10,221,428 $59,081 $202,944 $10,077, % As of December 31, 2009 Weighted Amortized Unrealized Unrealized Fair Average (in thousands) Cost Gains Losses Value Yield Mortgage-backed securities $3,605,892 $25,621 $141,033 $3,490, % Commercial paper and other 3,480,818 1, ,482, % U.S. Treasury securities 1,161, ,905 1,159, % U.S. Agencies 345,831 17, , % Asset-backed securities 462,896 6,580 99, , % Federal funds 708, , % Total $9,765,415 $51,980 $242,312 $9,575, % 11

13 A summary of the investments in an unrealized loss position presented by the length of time that the investments have been in a continuous unrealized loss position follows: As of March 31, 2010 Less than 12 months More than 12 months Fair Unrealized Fair Unrealized (in thousands) Value Losses Value Losses Commercial paper and other $1,636,970 $308 $ -- $ -- U.S. Treasury securities 1,269, Mortgage-backed securities 224, ,134, ,208 Asset-backed securities ,432 84,563 Total $3,131,206 $1,173 $1,406,118 $201,771 We evaluate our investment securities for other-than-temporary impairment on a quarterly basis. Factors considered in determining whether an impairment is other-than-temporary include: 1) the length of time and the extent to which the fair value is less than cost, 2) the financial condition and near-term prospects of the issuer and, if applicable, the financial condition of any financial guarantor, 3) the estimated cash flow projections compared to contractual cash flows, and 4) our intent to sell the impaired security and whether we are more likely than not to be required to sell the security before recovery. In addition, we qualitatively consider all available information when assessing whether impairment is other-than-temporary. Based on the results of these evaluations, if it is determined that the impairment is other-than-temporary, the loss is separated into credit-related and non-credit-related components. The credit-related portion is recognized through earnings and the non-credit related portion is recognized in other comprehensive income. The credit-related components of the other-than-temporary impairment losses were determined by projecting cash flows using cash flow models which require certain market assumptions. The significant inputs into the models include assumptions with regard to interest rates, prepayment speeds, default rates, and loss severities. The assumptions are applied at the individual security and associated collateral pool level. The unrealized losses primarily reflect concerns about the creditworthiness and liquidity of home mortgage related asset-backed and mortgage-backed securities. We determined that securities with a fair value of $138.5 million at March 31, 2010 were in an other-than-temporary loss position compared to securities with a fair value of $137.8 million at December 31, As a result of our evaluations, we have recognized $8.9 million in net impairment losses during the first three months of 2010, reflecting a gross impairment charge in 2010 of $12.4 million, net of $3.5 million which was recognized in other comprehensive income. We have determined no other securities were in an other-than-temporary loss position at March 31, The following is a roll forward of the activity during the period related to cumulative credit losses for which a portion of other-than-temporary-impairment was recognized in other comprehensive income: (in thousands) Balance as of January 1, cumulative credit losses for which a portion of an other-thantemporary impairment was recognized in OCI $72,129 Additions for credit loss on newly impaired securities 954 Additional credit losses related to previously impaired securities 7,898 Cumulative credit impairments at March 31, 2010 $80,981 12

14 A summary of the contractual maturity at fair value and weighted average yield by maturity of investment securities and federal funds follows: As of March 31, 2010 Year of Maturity One Year One to Five to More Than (in thousands) or Less Five Years Ten Years Ten Years Total Mortgage-backed securities $ -- $2,725 $362,833 $3,075,713 $3,441,271 Commercial paper and other 2,855, , ,070,173 U.S. Treasury securities 1,389,732 1,167, ,556,887 U.S. Agencies 5, , , ,727 Asset-backed securities -- 37,329 1, , ,615 Federal funds 314, ,892 Total $4,566,193 $1,670,555 $470,921 $3,369,896 $10,077,565 Weighted Average Yield 0.9% 1.8% 1.4% 1.6% 1.3% The expected average life is 4.4 years for asset-backed securities and 2.6 years for mortgage-backed securities. Expected maturities differ from contractual maturities because borrowers may have the right to prepay obligations. NOTE 4 SUBORDINATED NOTES In July 2009, AgriBank issued $500 million of 9.125% unsecured subordinated notes due 2019, generating net proceeds of $496.8 million. The effect of the transaction increased certain regulatory capital ratios. These notes are unsecured and subordinate to all other categories of creditors, including general creditors, and senior to all classes of shareholders. Interest is payable semi-annually on January 15 and July 15 beginning on January 15, Interest is deferred if, as of the fifth business day prior to an interest payment date of the notes, any applicable minimum regulatory capital ratios are not satisfied. A deferral period may not last for more than five consecutive years or beyond the maturity date of the subordinated notes. During such a period, we may not declare or pay any dividends or patronage refunds, among certain other restrictions, until interest payments are resumed and all deferred interest has been paid. The subordinated notes are not Systemwide debt and are not obligations of any of the other Banks of the Farm Credit System. Payments on the subordinated notes are not insured by the Farm Credit Insurance Fund. The inclusion of subordinated notes in regulatory capital ratios is subject to certain limitations. The amount of subordinated notes eligible to be counted as permanent capital and total surplus may not exceed 50% of core surplus, and is reduced by 20% of the original amount at the beginning of each of the last five years of the term of the notes. Additionally, the amount of subordinated notes that may be counted in total surplus must not exceed the lower of 40% of permanent capital or 100% of core surplus. Subordinated notes that are not included in permanent capital and total surplus due to these limitations are required to be included as liabilities for the purpose of calculating our net collateral ratio. NOTE 5 CAPITAL Farm Credit Administration's capital adequacy regulations require us to maintain permanent capital of at least 7.0% of risk-adjusted assets, a total surplus to risk-adjusted assets ratio of at least 7.0% and a core surplus to risk-adjusted assets ratio of at least 3.5%. At March 31, 2010, we exceeded these requirements with a 19.0% permanent capital ratio, 14.9% total surplus ratio, and 8.6% core surplus ratio. Farm Credit Administration regulations also require us to maintain a net collateral ratio of at least 103.0%. However, we are required by our regulator to maintain a higher minimum of 104.0% during the period in which we have subordinated notes outstanding. At March 31, 2010, our net collateral ratio was 105.8%. 13

15 NOTE 6 EMPLOYEE BENEFITS We participate in District-wide employee benefit plans. District net periodic benefit costs included the following components: (in thousands) Pension Other Pension Other Three months ended March 31, 2010 Benefits Benefits Benefits Benefits Components of net periodic benefit cost Service cost $5,346 $154 $4,838 $149 Interest cost 10, , Expected return on plan assets (11,499) -- (11,553) -- Amortization of prior service cost (259) (156) (258) (156) Amortization of loss or (gain) 5,387 (34) 3,356 (49) Net periodic benefit cost $9,680 $370 $6,510 $369 The District previously disclosed in our financial statements for the year ended December 31, 2009, that the District expected to contribute $23.0 million for pension benefits and $1.7 million for other postretirement benefits in As of March 31, 2010, District employers have not made a pension contribution. District employers presently anticipate contributing $25.4 million to fund pension benefits in As of March 31, 2010, District employers have contributed $378 thousand for other postretirement benefits. District employers anticipate contributing an additional $1.1 million for other postretirement benefits in 2010 for a total of $1.5 million. Our allocated portion of the benefit costs for the first three months of 2010 was $0.9 million for pension benefits and a credit of $31.0 thousand for other postretirement benefits. NOTE 7 FAIR VALUE MEASUREMENTS Valuation Techniques Authoritative guidance on Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value and requires disclosures for certain assets and liabilities measured at fair value on a recurring and non-recurring basis. These assets and liabilities primarily consist of investments available-for-sale, federal funds, derivative assets and liabilities, impaired loans, other property owned, and collateral liabilities. This guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. This guidance establishes a fair value hierarchy for disclosure of fair value measurements to maximize the use of observable inputs, that is, inputs that reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of the reporting entity. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs and the classification of our financial instruments measured on a recurring basis within the fair value hierarchy are as follows: Level 1 Level 1 inputs in the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 1 assets and liabilities could include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets. Our Level 1 assets at March 31, 2010 consist of U.S. Treasury Securities. Our Level 1 liabilities also include collateral liabilities. The majority of derivative contracts are supported by bilateral collateral agreements with counterparties requiring the posting of cash collateral in the event certain dollar thresholds of credit exposure are reached. The market value of collateral liabilities is its face value that approximates fair value. Level 2 Level 2 inputs in the valuation methodology include quoted prices for similar assets and liabilities in active markets; quoted prices in markets that are not active; and inputs that are observable, or can be corroborated, for substantially the full term of the asset or liability. Level 2 assets and liabilities could include certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities and derivative contracts. 14

16 The fair value of substantially all of our investment securities is determined from third-party valuation services that estimate current market prices. Inputs and assumptions related to third-party market valuation services are typically observable in the marketplace. Such services incorporate repayment assumptions and underlying mortgage- or asset-backed collateral information to generate cash flows that are discounted using appropriate benchmark interest rate curves and volatilities including LIBOR, Treasury and other Index benchmarks. Third-party valuations also incorporate information regarding broker/dealer quotes, available trade information, historical cash flows, credit ratings, and other market information. Such valuations represent an estimated exit price, or price to be received by a seller in active markets to sell the investment securities to a willing participant. The fair value of our derivative financial instruments is the estimated amount to be received to sell a derivative asset or paid to transfer a derivative liability in active markets among willing participants at the reporting date. Estimated fair values are determined through internal market valuation models. These models incorporate LIBOR swap curves, market volatilities, and other inputs which are observable directly or indirectly in the marketplace. We compare internally calculated derivative valuations to broker/dealer quotes to substantiate the results. Our Level 2 assets and liabilities at March 31, 2010 include derivative assets and liabilities, commercial paper, mortgage-backed securities and U.S. Agency securities, all of which have unadjusted values from third-party or internal pricing models. Level 2 assets also include federal funds. The market value of federal funds is generally their face value, plus accrued interest, as these instruments are highly-liquid, readily convertible to cash, and shortterm in nature. Level 3 Level 3 inputs in the valuation methodology are unobservable and supported by little or no market activity. Level 3 assets and liabilities could include investments and derivative contracts whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, and other instruments for which the determination of fair value requires significant management judgment or estimation. Level 3 assets and liabilities also could include investments and derivative contracts whose price has been adjusted based on dealer quoted pricing that is different than the third-party valuation or internal model pricing. Level 3 assets at March 31, 2010 include our mortgage-related asset-backed investment portfolio and non-agency mortgage-backed securities. Based on the relatively illiquid marketplace for these investments and the lack of marketplace information available as inputs and assumptions to the valuation process, we classified the mortgage-related asset-backed investment portfolio and non-agency mortgage-backed securities as Level 3 assets. The fair value measurement of these assets involved management s judgment and was based on multiple factors including information obtained from third-party valuation services using both Level 2 and Level 3 inputs. These inputs include volatilities, market spreads, prepayment speeds and dealer quotes. The classification of our financial instruments, measured at fair value on a non-recurring basis, is as follows: Level 3 and level 2 assets at March 31, 2010 include certain loans evaluated for impairment under FASB guidance which have fair values based upon the underlying collateral as the loans were collateral-dependent. Since the value of the collateral, less estimated costs to sell, was less than the principle balance of the loan, specific reserves were established for these loans. The fair value measurement would fall under Level 2 of the hierarchy if the process uses independent appraisals and other market-based information. The fair value measurement would fall under Level 3 of the hierarchy if the process requires significant input based on management s knowledge of and judgment about current market conditions, specific issues relating to the collateral, and other matters. Other property owned is classified as a Level 3 asset at March 31, The fair value for other property owned is based upon the collateral fair value. Costs to sell represent transaction costs and are not included as a component of the fair value of other property owned. 15

17 Assets and liabilities measured at fair value on a recurring basis are summarized below: As of March 31, 2010 Fair Value Measurement Using Total Fair (in thousands) Level 1 Level 2 Level 3 Value Assets: Federal funds sold and securities purchased under resale agreements $ -- $314,892 $ -- $314,892 Investments available for sale Mortgage-backed securities -- 3,091, ,684 3,441,271 Commercial paper and other -- 3,070, ,070,173 U.S. Treasury securities 2,556, ,556,887 U.S. Agencies , ,727 Asset-backed securities , ,615 Total investments available for sale 2,556,887 6,523, ,299 9,762,673 Derivative assets , ,348 Total assets $2,556,887 $7,108,727 $682,299 $10,347,913 Liabilities: Cash collateral pledged by counterparties $192,090 $ -- $ -- $192,090 Derivative liabilities -- 9, ,121 Total liabilities $192,090 $9,121 $ -- $201,211 As of December 31, 2009 Fair Value Measurement Using Total Fair (in thousands) Level 1 Level 2 Level 3 Value Assets: Federal funds sold and securities purchased under resale agreements $ -- $708,805 $ -- $708,805 Investments available for sale Mortgage-backed securities -- 3,108, ,035 3,490,480 Commercial paper and other -- 3,482,622-3,482,622 U.S. Treasury securities 1,159, ,159,268 U.S. Agencies , ,258 Asset-backed securities , ,650 Total investments available for sale 1,159,268 6,954, ,293 8,866,278 Derivative assets , ,900 Total assets $1,159,268 $7,906,097 $752,618 $9,817,983 Liabilities: Systemwide debt securities $ -- $100,249 $ -- $100,249 Cash collateral pledged by counterparties 170, ,197 Derivative liabilities -- 9, ,244 Total liabilities $170,197 $109,493 $ -- $279,690 We did not have any assets or liabilities transfer between levels during the first quarter of

18 The table below represents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3): Level 3 Instruments Only Total Fair Value Measurement Investments Available For Sale (in thousands) Asset-backed Securities Mortgage-backed Securities Derivative Assets Balance at December 31, 2009 $370,258 $382,035 $325 Total gains or losses realized/unrealized: Included in earnings -- (8,852) (325) Included in other comprehensive income 16,549 16, Purchases, issuances and settlements (54,192) (39,499) -- Transfers in and/or out of Level Balance at March 31, 2010 $332,615 $349,684 $ -- Level 3 Instruments Only Total Fair Value Measurement Investments Available For Sale (in thousands) Asset-backed Securities Mortgage-backed Securities Derivative Assets Balance at December 31, 2008 $625,579 $544,613 $1,200 Total gains or losses realized/unrealized: Included in earnings (16,066) -- (299) Included in other comprehensive income (11,178) (9,917) -- Purchases, issuances and settlements (109,855) (56,732) -- Transfers in and/or out of Level Balance at March 31, 2009 $488,480 $477,964 $901 Assets and liabilities measured at fair value on a non-recurring basis for each of the fair value hierarchy values are summarized below: As of March 31, 2010 Fair Value Measurement Using Total Fair Total (in thousands) Level 1 Level 2 Level 3 Value Losses Assets: Loans $ -- $ -- $54,761 $54,761 $4,464 Other property owned ,460 3, As of December 31, 2009 Fair Value Measurement Using Total Fair Total (in thousands) Level 1 Level 2 Level 3 Value (Gains) Losses Assets: Loans $ -- $ -- $46,526 $46,526 $6,764 Other property owned ,727 2,727 (295) 17

19 NOTE 8 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES Use of Derivatives We maintain an overall interest rate risk management strategy that incorporates the use of derivative products to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. Our goals are to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that movements in interest rates do not adversely affect the net interest margin. As a result of interest rate fluctuations, hedged fixed-rate liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by our gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate fluctuations is that the interest income and interest expense of hedged floating-rate liabilities will increase or decrease. The effect of this variability in earnings is expected to be substantially offset by our gains and losses on the derivative instruments that are linked to these hedged assets and liabilities. We consider the use of derivatives to be a prudent method of managing interest rate sensitivity, as it prevents earnings from being exposed to undue risk posed by changes in interest rates. We enter into derivative transactions, particularly interest rate swaps, to lower funding costs, diversify sources of funding, alter interest rate exposures arising from mismatches between assets and liabilities, or better manage liquidity. We may also enter into derivatives with our Associations as a service to enable them to transfer, modify or reduce their exposure to retail interest rate risk. We substantially offset this risk by concurrently entering into offsetting agreements with non-system institutional counterparties. Interest rate swaps allow us to raise long-term borrowings at fixed rates and swap them into floating rates that are lower than those available to us if floating rate borrowings were made directly. Under interest rate swap arrangements, we agree with other parties to exchange, at specified intervals, payment streams calculated on a specified notional principal amount, with at least one stream based on a specified floating rate index. We may purchase interest rate options, such as caps, in order to offset the impact of rising interest rates on our floating-rate debt, and floors, in order to offset the impact of falling interest rates on related floating-rate assets. The primary types of derivative instruments used and the amount of activity during the period (in notional amount) is summarized in the following table: (in millions) Receive-Fixed Swaps Pay-Fixed and Amortizing Pay-Fixed Swaps Floating-for- Floating and Amortizing Floating-for- Floating Interest Rate Caps Other Derivatives Balance at January 1, 2010 $7,415 $675 $1,350 $3 $466 $9,909 Additions Maturities/amortization Terminations Balance at March 31, 2010 $7,565 $658 $1,300 $3 $443 $9,969 Total (in millions) Receive-Fixed Swaps Pay-Fixed and Amortizing Pay- Fixed Swaps Floating-for- Floating and Amortizing Floating-for- Floating Interest Rate Caps Other Derivatives Balance at January 1, 2009 $9,130 $595 $1,650 $18 $268 $11,661 Additions Maturities/amortization Balance at March 31, 2009 $8,390 $578 $1,900 $13 $256 $11,137 Total By using derivative products, we expose ourselves to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes us, thus creating credit risk for us. When the fair value of the derivative contract is negative, we owe the counterparty and, therefore, we do not have credit risk to that counterparty. To minimize the risk of credit losses, we only deal with non-customer counterparties that have an investment grade or better credit rating from a rating agency and also monitor the credit standing and levels of exposure to individual counterparties. We do not anticipate nonperformance by any of these counterparties. We typically enter into master agreements that contain netting provisions. These provisions allow us to require the net settlement of covered contracts with the same counterparty in the event of default by the counterparty on one or more contracts. Substantially all derivative contracts are supported by bilateral collateral agreements with counterparties requiring the posting of collateral in the event certain dollar thresholds of exposure of one party to the other are reached. These thresholds vary depending on the counterparty s current credit rating. At March 31, 2010, our exposure to 18

20 counterparties, net of collateral, was $114.9 million. At March 31, 2010, we held cash collateral of $192.1 million and $21.9 million in pledged securities from counterparties. Our derivative activities are monitored by our Asset-Liability Management Committee (ALCO) as part of the Committee s oversight of our asset/liability and treasury functions. Our ALCO is responsible for approving hedging strategies that are developed within parameters established by the Bank s board of directors through our analysis of data derived from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into our overall interest rate risk-management strategies. Accounting for Derivatives Fair-Value Hedges: For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. We include the gain or loss on the hedged items in the same line item (interest expense) as the offsetting loss or gain on the related interest rate swaps. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Cash Flow Hedges: For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Derivatives not Designated as Hedges: For derivatives not designated as a hedging instrument, the related change in fair value is recorded in current period earnings in Miscellaneous income and other gains, net in the Statement of Income. Financial Statement Impact of Derivatives The following table presents the gross fair value of derivative assets and derivative liabilities. The fair value of our derivative contracts are presented as Derivative assets and Derivative liabilities in the Statement of Condition, and are presented net on the Statement of Condition for counterparties with master netting agreements. (in thousands) March 31, 2010 December 31, 2009 Fair Value Fair Value Fair Value Fair Value As of Assets: Liabilities: Assets: Liabilities: Derivatives designated as hedging instruments: Receive-fixed swaps $252,065 $2,037 $223,315 $13,759 Pay-fixed and amortizing pay-fixed swaps 45,195 26,265 48,323 21,984 Floating-for-floating and amortizing floating-for-floating swaps -- 5,440 1,111 1,277 Total derivatives designated as hedging instruments 297,260 33, ,749 37,020 Derivatives not designated as hedging instruments: Receive-fixed swaps Interest rate caps Other derivative products Total derivatives not designated as hedging instruments Credit valuation adjustment (1,597) -- (1,047) -- Total derivatives $295,757 $34,530 $272,554 $37,898 The fair value of derivatives includes credit valuation adjustments (CVA) which totaled $1.6 million at March 31, 2010 and $1.0 million at December 31, The CVA reflects credit risk of each derivative counterparty to which we have exposure, net of any collateral posted by the counterparty, and an adjustment for our credit worthiness where the counterparty has exposure to us. The CVA is included in Miscellaneous income and other gains, net on the Statement of Income. 19

21 The following table presents the effect of derivative instruments designated as hedging instruments on the Statement of Income. The gains or losses on the derivative instruments in the following table are recognized in Interest expense on the Statement of Income. (in thousands) For the period ended March 31, Amount of Gain or Amount of Gain or Derivatives - Fair Value Hedging Relationships (Loss) Recognized (Loss) Recognized Receive-fixed swaps $(1,812) $(2,010) Pay-fixed and amortizing pay-fixed swaps Floating-for-floating and amortizing floating-for-floating swaps Other derivative products -- (365) Total $(1,812) $(1,674) The following table presents the amount of OCI recognized on derivatives. The gain or (loss) on derivatives designated as hedges reclassified from accumulated other comprehensive income into income is included in interest expense on the Statement of Income. For the period ended March 31, 2010 (in thousands): Derivatives - Cash Flow Hedging Relationships Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion) Amount of Gain or (Loss) reclassified from AOCI into Income (Effective Portion) Amount of Gain or (Loss) recognized in Income on Derivatives (Ineffective Portion) and amount excluded from effectiveness testing Pay-fixed and amortizing pay-fixed swaps $(7,514) $346 $25 Floating-for-floating and amortizing floating-forfloating swaps (4,218) 2, Other derivative products - (365) -- Total $(11,732) $1,988 $25 For the period ended March 31, 2009 (in thousands): Derivatives - Cash Flow Hedging Relationships Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion) Amount of Gain or (Loss) reclassified from AOCI into Income (Effective Portion) Amount of Gain or (Loss) recognized in Income on Derivatives (Ineffective Portion) and amount excluded from effectiveness testing Pay-fixed and amortizing pay-fixed swaps $(19,799) $(1,643) $(45) Floating-for-floating and amortizing floating-forfloating swaps 2, Interest rate caps Other derivative products (730) Total $(18,367) $(297) $(39) 20

22 The following table presents the effect of derivative instruments not designated as hedging instruments on the Statement of Income. The gain or (loss) on derivatives not designated as hedges is included in Miscellaneous income and other gains, net on the Statement of Income. (in thousands) For the period ended March 31, Amount of Loss Amount of (Loss) Derivatives Not Designated as Hedging Instruments Recognized Gain Recognized Receive-fixed swaps $(161) $(1,542) Floating-for-floating and amortizing floating-for-floating swaps Interest rate caps (4) (10) Other derivative products (504) (1,092) Total $(669) $(2,604) NOTE 9 COMMITMENTS AND CONTINGENCIES We may, from time to time, be named as defendants in certain lawsuits or legal actions in the normal course of business. At the date of these financial statements, our management team was not aware of any such actions. However, management cannot ensure that such actions or other contingencies will not arise in the future. While primarily liable for our portion of Systemwide bonds and notes, we are jointly and severally liable for the Systemwide bonds and notes of the other Farm Credit System Banks. The total bonds and notes of the Farm Credit System at March 31, 2010 were $174.6 billion. NOTE 10 SUBSEQUENT EVENTS We have evaluated subsequent events through May 7, 2010, which is the date the financial statements were available to be issued. 21

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24 375 Jackson St. St. Paul, Minnesota (651) agribank.com